Commentary

The Truth about Those Bonus Billions

“Wall Street Bonuses Are an Outrage,” says Wall Street Journalcolumnist Thomas Frank.

His latest outburst of “populist rage” is directed at an $18.4 billion figure he does not understand. That figure, he observes, has “the entire country … screaming for revenge on money power that has done us so wrong while rewarding itself so generously.”

Meanwhile, the self-described populist activist Jim Hightower wrote, “Despite their historically disastrous year in 2008, Wall Street investment bankers awarded themselves a total of $18.4 billion in bonuses—the sixth-largest payout on record!”

Viewing outrage as an adequate substitute for knowledge, reporters and politicians alternated between being ignorantly angry and angrily ignorant. “Anger as Wall St. Bosses Feather Nests,” ran a recent The Washington Post headline. Sen. Chris Dodd, D-Conn., head of the Banking Committee, vowed to use “every possible legal means to recoup the $18.4 billion in Wall Street bonuses,” saying, “This infuriates the American people and rightly so.”

President Obama expressed fury over the $18.4 billion figure he calls “the height of irresponsibility. It is shameful. And part of what we’re going to need is for the folks on Wall Street who are asking for help to show some restraint and show some discipline and show some sense of responsibility. … There will be time for them to make profits, and there will be time for them to get bonuses. Now’s not that time.”

Not to be outdone, Vice President Biden said, “I’d like to throw these guys in the brig.”

All of this populist rage toward Wall Street bosses and banks provided a handy excuse for the Obama administration’s quixotic crusade to cap salaries. What nobody bothered to notice, however, was that the $18.4 billion figure had nothing to do with top executives, or with banks or insurance companies.

As it turns out, New York State Comptroller Thomas P. DiNapoli’s famed $18.4 billion estimate was actually based on “forecasts subject to revision” derived from “personal income tax withholding collections and industry revenue and expense data.”

Furthermore, the resulting figures for bonuses were not paid by “Wall Street” as most people understand that phrase. In fact, the figure excludes commercial banks and insurance companies in New York state, but includes industries involved in the “Securities, Commodity Contracts, and Other Financial Investments and Related Activities.”

The bonuses refer to Category 523 within the Commerce Department’s North American Industry Classification System (NAICS.) Officially, establishments that fall into NAICS 523 are “primarily engaged” in one of the following:

“(1) underwriting securities issues and/or making markets for securities and commodities; (2) acting as agents (i.e., brokers) between buyers and sellers of securities and commodities; (3) providing securities and commodity exchange services; and (4) providing other services, such as managing portfolios of assets; providing investment advice; and trust, fiduciary, and custody services.”

In 2002, NAICS’ Category 523 included 72,338 firms, with a total of 832,144 employees earning a total of $103.4 billion. Another 312,845 people in these fields were self-employed.

A big share of that $103.4 billion 2002 payroll, reportedly as much as half, routinely includes an annual bonus. New York’s 9,716 firms in this group surely accounted for a huge share of the revenue, and therefore of the bonuses, which are often paid in stock, not cash.

Investment banking and securities dealing accounted for only 31.6% of this huge group’s 2007 revenues of $461.1 billion and likely a smaller percentage in 2008. Over 25% of Category 523 receipts come from portfolio managers. The remaining revenue was generated from a diverse mix of commodity and bond traders, stock exchange employees, mutual funds, trusts and investment advisers, as well as hedge fund managers who have been known to collect more than $1 billion apiece in bonuses.

Commercial banks, however, are not included in this bogus bonus statistic. Aside from the fact that many banks, like Bank of America and Wells Fargo, are far from Wall Street, commercial banks are in a completely separate NAICS category (522110). Insurance companies such as AIG are also outside of NAICS 523.

How did so many journalists and politicians, including the president of the United States, deceive themselves into imagining that top executives at a handful of big banks could possibly have “paid themselves” billions of dollars in year-end bonuses?

After all, it has been widely reported that no bonus was paid last year to top executives of JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Merrill Lynch, Morgan Stanley, etc.

The CEOs of at least seven other financial firms did not collect a bonus because each was fired. Martin J. Sullivan left AIG in July 2008. By Sept. 19, the AIG stock that was to be his golden parachute had dropped to $173,000. The former CEO of Freddie Mac “walked away with” stock valued at $130,000 at that time—worth even less today.

So, all of the outrage is not really about Wall Street bonuses at all, but about an outrageous statistic in a one-page report none of these raging populists bothered to examine.

To use this ridiculously irrelevant estimate to attack the character of American business leaders is the height of irresponsibility. It is shameful. Anyone who does this sort of thing ought to show some restraint and some sense of responsibility.

Alan Reynolds is a senior fellow with the Cato Institute and the author of Income and Wealth.